The June Institute for Supply Management (ISM) Services Index was a bit softer than expected (60.1 vs. the Bloomberg consensus estimate of 63.5), although the overall reading remained near multi-year highs. The June figure also came in lower than May’s reading of 64.0. Survey respondents were bullish on many components of the overall index, including remaining order backlogs that needed to be filled and pricing power. However, supply managers did point to the proper availability of labor as a chief concern. The labor component was down sharply from previous months. In sum, the overall index points to an economy firmly on the mend, but one that is suffering from some of the imbalances often associated with a shock to the economy’s supply/demand equilibrium.
“The U.S. economy’s services sector continues on its robust recovery trajectory, although the June figures were not quite as good as expected. Interestingly, services supply managers, like their manufacturing counterparts, have begun to highlight the difficulty in rebuilding their post-crisis workforces; a situation that may take a while to resolve,” explained LPL Director of Research Marc Zabicki.
As we look at various elements of this survey, it appears extended unemployment benefits may be contributing to some of the labor supply constraints pinpointed by supply managers. This may be most acutely felt in the services sector, where many businesses shut down, furloughed employees, and now must re-hire again.
Meanwhile, we are particularly interested in the prices component of this survey. If we look at the history of the ISM Services survey over the last 15 years, the much-talked-about rise in prices is not much different from what was witnessed as we exited the Financial Crisis (2009-2010). The prices component is clearly higher today, although prices did spike to a high level in 2010 before settling back down as supply/demand elements of the economy found an equilibrium. We would anticipate the same to occur this time around as post-COVID supply challenges correct.
Overall, this report does not change the broad picture of a robust economic recovery, but service sector business are still facing some meaningful but likely temporary challenges to ramping back up.
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